One of the ways I’ve been working with startups to raise money is through crowdfunding. You might be most familiar with Kickstarter but there are dozens of other companies that help to fund companies that are too small for VC funding but need capital to grow.
I’ve always thought that this was a good thing. Many entrepreneurs aren’t well-connected to a network of people who can afford to invest. Having entities such as Kickstarter available to raise the startups’ visibility and to grow their investor pool seems valuable. Something I read this morning, however, challenges my thinking.
Crowdsourcing initiatives like Kickstarter are hurting innovation, according to a new study from a business school, INSEAD. Researchers found that the ‘crowd’ appetite for investing in innovative products is startlingly low. Claims of novelty and usefulness are viewed unfavorably and result in lower pledge figures on crowdfunding initiatives. This is significant as the equity crowdfunding industry is set to surpass venture capital as the leading source of startup funding.
Data from Kickstarter from its inception in 2009 to 2017 was interpreted by state-of-the-art machine learning technology that incorporates speech and image recognition, seasonality, perceived risk, etc. to determine the funding success of both ‘novel’ and ‘useful’ products. This is the first time large-scale speech analysis and image recognition has been applied to the study of innovation. You can check out the full research here. What it found was that the Kickstarter community does not view claims of product novelty and product usefulness as congruent. While the total amount pledged is boosted when a product is said to be useful (or alternatively, novel), claiming that it is both reduces the total amount pledged by 26 percent. In fact, a single claim of novelty increases project funding by about 200 percent, while a single claim of usefulness leads to an increase of about 1200 percent, as compared to projects devoid of any such claim.
I’ll let three academics explain why this might be hurting innovation:
“Prior research has shown that products that are novel and useful typically succeed in the marketplace,” said study co-author Amitava Chattopadhyay, Professor of Marketing and the GlaxoSmithKline Chaired Professor of Corporate Innovation at INSEAD. “But when projects make both claims, backers either assume a product’s benefits are inflated, that it carries a high risk of failure or that it divides the crowd between believers and skeptics, making it hard for backers to pick a side.”
“The higher level of uncertainty in the crowdfunding context drives backers to choose modest innovations and shy away from more extreme innovations,” said Cathy Yang, Assistant Professor of Marketing at HEC Paris.
“This is deeply disappointing as the premise of crowdfunding is to support creativity and innovation”, said Anirban Mukherjee, Assistant Professor of Marketing at Singapore Management University. “Entrepreneurs, therefore, might be advised to frame a project as only novel or only useful, rather than both”, Dr Ping Xiao of the University of Technology Sydney (UTS) added.
Something I’ll be keeping in mind when putting together a crowdfunding campaign. It seems a little sad though, doesn’t it?